1. Field of the Invention
The present invention relates to a method and system for establishing and maximizing the price of fungible items through the use of two or more interdependent auctions of two or more sets of fungible items conducted substantially simultaneously. More specifically, the present invention relates to such a process and system implemented in an electronic trading network wherein the fungible items in preferred embodiments may be securities such as stocks, bonds and instruments related thereto.
2. Description of Background Art
Convertible bonds, by their nature, are sensitive to the common stock into which they are convertible (underlying securities). Many investors in convertible securities purchase them at the original issuance as well as in the secondary market. However, many potential investors in securities do not have the opportunity to purchase convertibles upon original issuance in a manner consistent with their investment philosophies, specifically hedge funds. In order to understand the uses of the invention, one must understand that increasing the number of potential buyers of an issue could have a positive impact on the ability of the issuer or underwriter to attain a higher price level and that each buyer will attempt to attain its own objectives.
Currently, new issues of convertible securities are managed by underwriters who are contracted by issuers to sell convertible securities on the issuers' behalf into the capital markets. Underwriters have many tools at their disposal when selling securities, salesmen, road shows, management's time, and relationships with customers among a few. Typically, at the end of the selling process, customers of the underwriter will indicate a level of interest in the securities by indicating the amount they would like to purchase. Some of these indications will be price sensitive and some will be noncompetitive. The underwriter and issuer decide the price of the newly issued securities and allocate the issue to buyers. Most securities are priced and allocated while the market is closed.
In the past few years, a new mechanism for issuing corporate securities has emerged: the Dutch auction. While the Federal Reserve Bank has used a similar process to issue government bonds for years, the process has been reinvented for corporate and municipal securities with the most recent offering being the auction of a municipal bond issue. The procedure involves the establishment of a single price for all allocations in a Dutch auction offering of securities. Generally, anyone bidding below the final price received no allocation and anyone bidding above the price receives a full allocation up to his indicated buy interest (those who were bidding the same price as the established price are given a proration.) Buyers can place multiple bids for different quantities at different prices. The issue price is established by searching for the first price in which the cumulative quantities for which bids at that price or higher equal or exceed the quantity to be sold in the auction.
Hedge funds in the convertible securities space are, by their nature, relative value participants. They attempt to purchase convertible securities when they believe they are cheap relative to the underlying common stock. When they make a purchase they generally sell or short the underlying stock in some “hedge” ratio in order to lock-in the value (cheapness) until the convertibles can be sold and the stock simultaneously re-purchased. These participants generally like to purchase convertibles while simultaneously selling the underlying common stock, but the new issue process, by its nature, precludes this practice. Firstly, the markets are closed when pricing occurs so they cannot sell or short the underlying common, and secondly, they are considered a less desirable buyer in any underwriting because of their after-market selling tendencies. Accordingly, a need in the art exists for a process that alleviates both problems provides the underwriter and issuer a more visible picture of demand for the new issue.